The Optimal Capital Structure Has Been Achieved When The

question 15

Multiple Choice

The optimal capital structure has been achieved when the:

• A)weight of equity is equal to the weight of debt.
• B)debt-to-equity ratio selected results in the lowest possible weighted average cost of capital.
• C)firm is totally financed with debt.
• D)debt-to-equity ratio is such that the cost of debt exceeds the cost of equity.
• E)cost of equity is maximized.

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Definitions:

After-Tax Net

The remaining income of a business or investment after all taxes have been deducted.

Unlevered Cost

Refers to the cost a company would incur without the benefit or cost of debt financing.

Capital Structure

The mix of a company's long-term debt, specific short-term debt, common equity and preferred equity, which is used to finance its overall operations and growth.

Economic Expansion

A phase of the business cycle where the economy grows and increases in activity, marked by rising GDP, employment, and income.